For-profit colleges that don’t produce graduates capable of paying off their student loans could soon face the wrath of the federal government.

Schools with career-oriented programs that fail to comply with the new rule being announced Thursday by the Obama administration stand to lose access to federal student-aid programs.

To meet these “gainful employment” standards, a program will have to show that the estimated annual loan payment of a typical graduate does not exceed 20 percent of his or her discretionary income or 8 percent of total earnings.

The Education Department estimates that about 1,400 programs serving 840,000 students won’t pass. Ninety-nine percent of these programs are offered by for-profit schools, although affected career training programs can come from certificate programs elsewhere in higher education.

Education Secretary Arne Duncan says the department wants to make sure that programs that prey on students don’t continue abusive practices.

On the one hand, the administration proposes to extend PAYE to all student borrowers starting in 2015, regardless of when they borrowed. That would be nice.

But the administration proposes sharply reducing the loan forgiveness available to high-debt student loan borrowers (except they refer to these cuts as “reform[ing] the PAYE terms to ensure that program benefits are targeted to the neediest borrowers.” The proposed “reforms” are a response to criticism arguing that existing forgiveness provisions permit already expensive schools to continue raising tuition with impunity.

Whether or not President Obama’s recent education-themed speeches are in direct response to Matt Taibbi’s must-read Rolling Stone magazine article on the college loan crisis, it is great news that the White House is now taking the crisis more seriously. The credit bubble in college loans has ballooned into a systemic threat to the nation’s economy. Additionally, as Taibbi documents, economic and political trends are now forcing an entire generation into a truly no-win situation: Either don’t get a post-secondary education and harm your job prospects, or get a post-secondary education and condemn yourself to a lifetime of debt.

The economic trend fueling this perfect storm is about job credentials. Peruse employment data and you’ll see that the New York Times was right when it declared that “the college degree is becoming the new high school diploma: the new minimum requirement, albeit an expensive one, for getting even the lowest-level job.” Though the Times notes that the weak economy means the job outlook for college grads “is rather bleak,” it is even more bleak if you don’t have a post-secondary degree.

So, yes, some form of higher education is now increasingly as necessary as a high school diploma. Yet, in our financing models, America still isn’t treating it as such. Just consider the critical difference between how high school and college education programs are funded.

The former is funded by broad-based taxes and few would ever suggest changing it to an individual tuition system. Why? Because we’ve come to view access to high school as a right. This view is based not just on notions of morality but also on an economic calculation. Basically, we know we need a workforce with as many high school graduates as possible, and we’ve decided that forcing young people to go into crushing debt to get a high school degree would deter many from getting the degree.

Yet, even though we know that higher education is also an economic necessity, we do not have the same funding model or outlook for college. Instead, we still predicate access to higher education on a student’s wealth and/or their willingness to go into crushing debt.

Deploring the rising costs of a college education, President Obama vowed on Thursday to try to shame universities into holding their prices down and to eventually use federal student aid as leverage in that effort.

Speaking at the University at Buffalo, where tuition and fees now total about $8,000 per year for New York residents, Mr. Obama said the middle class and those struggling to rise out of persistent financial struggles were being unfairly priced out of the higher education market.

“Colleges are not going to just be able to keep on increasing tuition year after year and passing it on to students,” Mr. Obama told an enthusiastic audience of about 7,200 students and others in the university’s auditorium. “We can’t price the middle class and everybody working to get into the middle class out of college.”

The president said rising prices at colleges were partly driven by the distribution of $150 billion in federal assistance to students. He said that colleges that allowed tuition to soar should be penalized by getting less aid for their students, while colleges that held down costs should get more of the money.

He announced plans to create a federal rating system that would allow parents and students to easily compare colleges. And he said he would urge Congress to pass legislation to link the student aid to the rating system.

“It is time to stop subsidizing schools that are not producing good results,” Mr. Obama said to a roar of applause from the students in the audience.

The president offered his college affordability proposals at the beginning of a two-day bus tour through upstate New York and Pennsylvania. It is part of a campaign to highlight proposals that his administration says will help the middle class economically.

According to a Modern Healthcare analysis of federal records, more than 5,400 of the 51,729 people on the government health entitlement blacklist were placed on it after failing to pay an HHS-backed medical student loan. Given a still-shaky economy, some in the health care sector expect that trend to continue.

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The increasing frequency of default-related blacklisting could prove problematic as the Obama Administration tries to entice more medical students to become primary care and family doctors. Primary care providers and nurse practitioners will be crucial to effective Obamacare implementation, since the health law is expected to drive up demand for medical services as millions of previously uninsured Americans gain coverage.

But the ballooning cost of a medical education could end up being a major barrier to the Administration’s recruitment efforts. According to the Association of American Medical Colleges’ (AAMC) 2012 report on medical school debt, “86 percent of medical school graduates had education debt, with a median amount of $162,000″ in 2011 — a number that has been rising steadily over the years.

AAMC estimates that a borrower with the median $162,000 debt “would have monthly payments ranging from $1,500 to $2,100 after residency.”

That disproportionately affects the very primary care doctors that are integral to health care reform and the U.S. medical system at large. In a 2012 report, consulting firm Merritt Hawkins & Associates found that family practitioners, pediatricians, and psychiatrists are the lowest-paid physician groups in the U.S. with a base pay of $189,000.

While that’s still a lavish salary compared to average U.S. compensation, it pales in comparison to specialist pay — and as the entitlement blacklist numbers underscore, that contributes to a system in which care providers are banned from treating certain patients for purely financial, rather than medical or criminal, reasons.

So say Nicole Allan and Derek Thompson, who argue in this month’s issue of The Atlantic that the economic returns of college far outweigh the burden of student loan debt.

“Horror stories of students drowning in $100,000+ in debt might discourage young people from enrolling in college, but they are as rare as they are terrifying,” Allan and Thompson wrote in the article. “The economic value of college, meanwhile, is indisputable.”

Allan and Thompson looked for crisis in the wrong places. Six-figure calamities are indeed rare, but millions of Americans are caught between stubbornly weak labor markets and increasingly costly higher education.

In a sweeping study of the private student lending market released today, a new federal consumer protection agency compares private loans to subprime mortgages and urges Congress to consider letting borrowers discharge such loans in bankruptcy.
The study, months in the making, touched a nerve as the Consumer Financial Protection Bureau began gathering information about private loans and concern grew about student debt. Almost 2,000 people — borrowers and their family members, as well as representatives of banks, research groups and higher education organizations — wrote in to describe their experiences with student loans and to urge the bureau to act.

The result was a report examining the varied private student loan market, which makes up less than 15 percent of all outstanding student debt but is often criticized because its loans offer fewer protections than their federal counterparts. The consumer protection bureau found that loans made just before the financial crisis were among the riskiest, made to students with low credit scores and often without co-signers or involvement from their colleges’ financial aid offices. A majority of those students had not exhausted their federal borrowing options beforehand.

“Our findings reveal that students were yet another group of consumers that were hurt by the boom and bust of the financial crisis,” Richard Cordray, the bureau’s director, said in a conference call with reporters Thursday afternoon. “Too many student loan borrowers were given loans they could not afford and sometimes for more money than they needed. They are now overwhelmed by debt and regret the decisions they made.”

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Between 2005 and 2008, private student lending boomed, increasing from about $7 billion to over $20 billion in 2008. At its peak, private lenders made loans to students with low credit scores and no co-signers, often allowing borrowers to take out loans that far exceeded the cost of attendance at their colleges.